DALLAS -- Fleming here said last week it will acquire two convenience-store distributors and that the nearly $4 billion in resulting revenues expected this year, based on pro forma estimates, will more than offset the anticipated loss of $900 million in sales to Kmart Corp., Troy, Mich.
The company said the acquisition may also enable it to further increase its distribution business with national supermarket chains.
However, the company said the principal reason for the acquisitions is to solidify its position as the second-largest convenience-store distributor after McLane Co., Temple, Texas, which is owned by Wal-Mart Stores, Bentonville, Ark.
Analysts told SN the deals represent the continued success of Fleming in extending its distribution business beyond its traditional base of independent supermarkets. Discussing the transaction during a conference call with investment analysts, Mark Hansen, Fleming's chairman and chief executive officer, said the two acquisitions "place us in a leading position in a very large, very fragmented market. The acquisitions make us fully able to take advantage of consumer-buying trends as they move from format to format."
The two companies Fleming plans to acquire are Core-Mark International, South San Francisco, Calif., which had 2001 sales of $3.4 billion, and Head Distributing, Atlanta, which had sales of $350 million last year, according to Fleming.
The Head Distributing acquisition closed last week, Fleming said. The company added that it expects the Core-Mark acquisition to close within 90 days, pending usual closing requirements.
The combined purchase for Head Distributing and Core-Mark is expected to be approximately $430 million, which includes the payment of cash and assumption of debt from both companies, according to Fleming.
To pay for these transactions, Fleming said it expects to file a shelf-registration statement for the sale of up to $600 million of debt and/or common stock. The company also said it plans to refinance its existing senior credit facility later this spring, which will eliminate all debt securities maturing before 2007.
Hansen noted that the acquisitions increase the role of Fleming as a supplier to national supermarket companies.
Core-Mark supplies "convenience-type" items to stores operated by Albertson's, Boise, Idaho, and Safeway, Pleasanton, Calif., according to Hansen. As previously reported, Fleming earlier this year began supplying Albertson's stores in Oklahoma and Nebraska.
Hansen said Head's principal customer is Golden Gallon, Chattanooga, Tenn., a convenience chain owned by Dutch retailer Ahold.
However, Hansen said the primary reason for the purchase was to strengthen Fleming's position in the convenience-store distribution business, which the company sees as a $50 billion-a-year channel for supermarket items poised to grow 7% annually.
In contrast, Hansen said, independent supermarkets are a $110 billion-a-year channel likely to shrink 2% annually.
"The acquisitions further our strategy of diversifying our distributor base," he said.
Fleming said the acquisitions would shift the make-up of its projected customer base for 2002 from 14% convenience customers, 26% Kmart and 60% all others, including supermarkets, to 34% convenience, 19% Kmart and 47% others.
Fleming also said it would boost projected sales for this year from a pre-acquisition estimate of $14.2 billion to a post-acquisition $18.2 billion.
Hansen said Fleming expects the acquisitions to be accretive to earnings beginning in 2003. He added that the company expects to raise its earnings guidance for next year when it reports first-quarter results May 7.
Synergies from the deal are estimated to be 0.5% (or $20 million) in 2003, 0.75% ($30 million) in 2004 and 1% ($40 million) in 2005.
Meredith Adler, equity analyst, Lehman Brothers, New York, told SN that she "had to applaud Fleming management on making the transformation" from largely supplying independent supermarkets to a more diverse customer base.
"From the beginning, Fleming's management has talked about needing to diversify sources of revenue," she said. "There isn't a scrap of data that says the independent supermarket sector is growing. So they developed a plan for diversifying."
She added that the decision to become the main supplier for Kmart was part of the diversification effort. "When Fleming started its discussions with Kmart, there was no way for Fleming to know Kmart was going to start spiraling downhill," she noted.
She said Fleming "has already accomplished its goal of diversifying by adding the Kmart revenues, and the Kmart business becomes less and less important to it over time."
Alder said she did not expect Fleming to make major inroads distributing to national supermarket companies. "I don't think they're ever going to become a main supplier for Safeway or Albertson's," she said.
However, Adler noted that Fleming's national distribution network, now with a stronger presence in the C-store business, could enable the company to wrest the distribution contract for corporate stores owned by 7-Eleven here from the current contract holder, McLane.
She said McLane's contract expires in the fall, and 7-Eleven has said it does not expect to announce its decision about a new contract until sometime during the summer.
